Entries for 'procurement'

Ahh, the nicer weather is upon us and summer is finally here. No better time to ice up the beverages and slap some burgers, hot dogs, chicken, and other select meats and vegetables on the grill.

Now that you have this great visual, take a moment to stop and think what it really costs to get an average barbeque together before it hits the grill.

Rapidly rising and volatile commodity prices are causing fluctuations in the cost of the raw materials, packaging, and energy that food and beverage companies must purchase in order to provide the ice cold beer, potato chips, ketchup, and other barbeque staples. When food and beverage companies aren’t properly equipped to manage this volatility, the result is reduced profit margins, and oftentimes higher prices.

For example, the ketchup that is put on hamburgers contains commodities such as tomatoes, sugar, salt, and corn syrup. When the price of wholesale tomatoes more than tripled back in 2011, Heinz cut portions of several key products, including its flagship Heinz 57 sauce, which now comes in a bottle that has shrunk by four ounces, but costs the same as the original, larger bottle.

While passing along increased costs to consumers is a very common practice, there are other options. Companies including Heineken are taking advantage of advanced technology solutions to minimize the impact of commodity volatility on their bottom lines so they don’t have to pass along price increases to the consumer. These solutions, which include Triple Point’s Commodity XL Strategic Planning and Procurement™, provide customers with powerful tools for fully mitigating and managing commodity exposure. Companies that don’t invest in the technologies and processes to properly manage this exposure will lose out on a significant competitive advantage, and risk being left behind.

Triple Point will join CPOs from Barilla and Chesapeake Packaging on a webinar panel on April 18th, to discuss commodity risk and potential solutions. For more details, click here.

Did you see the recent headline: Samoa Air to price tickets by passenger weight? All fat jokes aside, the underlying logic for the pricing change is so Samoa Air can find the best way to manage jet fuel costs. Each pound shed from a plane saves the company 14,000 gallons of fuel each year. At roughly $3.03 per gallon, that’s $42,400 per year that drops to the bottom line for every one pound reduction.

Analysts have been bifurcated in their opinions of Samoa Air’s new pricing scheme with some thinking it’s a brilliant idea and others that believe it can’t work. I’ll leave it to the pundits to debate the pros and cons of the best way to price airline tickets. But the concept of finding new ways to manage commodity risk is not at all surprising. Managing commodity input costs is the next major challenge for many organizations.

It’s not just airlines that have the daunting task of managing commodity input costs such as fuel. Faced with fundamental changes in the commodities and energy market environment, most manufacturers, including beverage, food, CP, chemical, and industrial, are wrestling with the best approach to protect margins from volatile and rising commodity costs. The risk runs a wide gamut of costs including energy to run plants and distribution fleets, raw materials that are inputs to products, and packaging for finished goods (e.g. aluminum, cardboard). Commodity costs are a major percentage, and the most volatile, of a manufacturer’s spend.

To preserve margins, manufacturers must move quickly to approach commodity procurement differently and more proactively than ever before. While not traditionally viewed as commodity trading organizations, manufacturers can learn from leading commodity trading houses and adopt new processes, tools, and measurements required to optimize raw material acquisition while ensuring compliance with new regulatory demands.

It’s shocking, but I still find many companies that manage commodity risk in spreadsheets. Today’s complex and volatile markets require Procurement to use sophisticated software tools such as Commodity XL™ from Triple Point to not only ensure coverage, stay within budget, and deliver the material when manufacturing needs it, but also to analyze commodity risk and perform scenario analysis. The new benchmark for procurement organizations is how well spend is managed relative to market prices and competitors, not just how well the budget is managed.

Heavy users of raw materials face a huge challenge. The prices of many of the world’s key commodities reached all-time highs last year, and volatility across the markets was more than enough to create huge problems for companies in the industrial manufacturing and consumer products industries.

It’s easy to find startling examples of price volatility in every category from arable crops and metals to timber, oil, and chemicals. And it’s also easy to see the consequences of such volatility in companies’ bottom lines – time and time again, there are stark reminders that sharply rising raw material costs can impact profitability.

For example, spice and condiment manufacturer McCormick saw first quarter profits hit by 3% because of higher than expected raw material costs. And Swiss agribusiness company Syngenta cautioned that its 2012 results would be impacted for the same reason.

According to a new white paper on Commodities Management from Procurement Leaders, there are several ways to fight back, including hedging, forming strategic supplier alliances, and leveraging advanced technology solutions. The paper provides a good primer on the subject, and discusses how companies including Unilever have successfully controlled skyrocketing raw material costs. Read it now.